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December 20, 2012

Devil Is in Insurance Policy Details When HNW Clients Are Sued

Opening a letter that says you are being sued has to be one of the least desirable moments in life. Unfortunately, it’s one that wealthy families increasingly fear. In an ACE survey of households with $5 million or more in investable assets, 82% felt their wealth alone made them an attractive target for lawsuits. Moreover, given the tepid economic recovery, many believed their likelihood of being sued had risen.

What do wealthy families fear most about being sued? Surprisingly, it’s not being insufficiently insured and having to sell off assets in a costly settlement or verdict. Rather, they fear the time, stress and expense of defending themselves from lawsuit. More than half the respondents in the ACE survey cited those concerns, compared to a third who cited insufficient insurance and financial loss. For some families, reputation damage tops their list.

To be sure, insufficient liability coverage poses a key threat to families with substantial assets. Jury awards and settlements for damages involving serious injury can reach into the tens of millions of dollars. Since liability coverage in auto and home policies rarely exceeds $500,000, a sound wealth protection plan must include adequate limits of umbrella liability coverage to protect assets at risk.

But these research findings indicate that to effectively connect with high-net-worth clients about liability risk, wealth advisors also should be prepared to discuss solutions for dealing with the expense, time, stress and reputational threat of mounting a legal defense.

It’s an area where the fine points of the policy can make a big difference. Important aspects of coverage for each concern are:

Defensecosts: HNW clients correctly fear the prospect of high defense costs. In complicated cases, especially those involving multiple injured parties suing individually, the cost of attorney fees, expert witnesses and court fees can skyrocket. In one case, litigation lasted three years when party guests suffered serious injuries due to a deck that collapsed. If defense costs count as part of the coverage limit, as they do in some policies from carriers serving the mass market, the client could soon have little left to pay for an unfavorable award or settlement. By contrast, policies from carriers that specialize in serving high-net-worth clients will pay for legal costs outside of the liability coverage limit, removing any worry about the cost of defense.

Time and stress: Having confidence in your legal team goes a long way towards reducing the stress of being sued. Are they the best in the country? Do they have my interests at heart? Carriers that specialize in serving HNW clients routinely work with legal firms that understand the unique and complex issues that can arise in high-profile cases. They appreciate the busy lives that HNW clients often lead, and show great flexibility when scheduling depositions and other meetings that demand the client’s time. Furthermore, these carriers provide coverage for the family to hire their own lawyer to monitor the work of the legal team as an added reassurance. In many cases, the personal lawyer can also help the client with fulfilling important document requests and other tasks associated with the case that would otherwise tax the client.

Reputation damage: Many high-net-worth clients hold prominent positions in their community or are outright celebrities. Lawsuits involving allegations of intoxication, mistreatment of household staff, libel or slander, or other inappropriate behavior— whether genuine or frivolous—can attract unfavorable press coverage and threaten careers. Indeed, due to this vulnerability, the press is often utilized as a means of forcing a quick and generous settlement. Carriers that specialize in serving HNW clients understand this dynamic and offer reputation damage coverage as a result. This coverage allows the client to hire a public relations firm to prevent or counter unfavorable coverage and help restore a damaged reputation. Sometimes this coverage is only available when the client has purchased employment practices liability insurance related to domestic employees. In the best cases, it is available as part of the basic umbrella liability policy.

By recognizing the concerns that motivate HNW families and the differences among insurance carriers in addressing them, advisors can strengthen client relationships and build loyalty while better protecting their client’s wealth.